Brokers must think twice before tweeting, Facebooking

Financial firms that sell investment products have long been restricted in how …

If you're a registered broker or work for firm that sells any sort of investment products, you'll want to think twice before blurting out anything that could be construed as investment advice on Facebook, Twitter, or any other social networking site. The Financial Industry Regulatory Authority (FINRA) has updated its guidelines for interpreting the rules that govern how brokers present advice to the public to cover online social networks; and, in some cases, the guidelines rely on social network monitoring and archiving technology that doesn't even exist yet.

The new guidelines have two broad effects on the way financial firms use social media. First, the new rules attempt to take the traditional distinction between marketing a brand and hawking specific investment products, and to enforce it in online venues that sport a constantly evolving slate of features and functionality, and where the lines between the personal and the professional—or, the personal and the promotional—aren't always clear.

Take Facebook, for example, where ostensibly personal accounts nonetheless indicate where an individual works. A broker might not only identify himself as an employee of a particular bank or brokerage in his Facebook profile, but he might also be a fan of his employer's official Facebook page, and belong to various unofficial Facebook groups that use the company's name and logo.

Based on the new guidelines, it appears that the static parts of a Facebook page, like an employee's personal profile, fall under the FINRA rules that govern firms' marketing to the public, with the result that they need formal approval before being posted. The dynamic, conversational parts of a page—specifically, Facebook's wall, a blog's comments section, and other places where users interact with each other—could constitute a "public appearance" on behalf of the firm, which means posts don't have to be approved beforehand, but "firms must supervise these interactive electronic communications under NASD Rule 3010 in a manner reasonably designed to ensure that they do not violate the content requirements of FINRA's communications rules."

When it comes to sorting out which communications are business-related, or even which posts or tweets run afoul of the rules, the FINRA is taking a "we know it when we see it" approach that appears to grant some leeway for interpretation. Phrases like "whether a particular communication constitutes a 'recommendation' for purposes of Rule 2310 will depend on the facts and circumstances of the communication," are typical throughout the document; reference to the specific "facts and circumstances" of a particular communication are common. The point seems to be to err on the side of caution, because it's not always clear what will get you in trouble.

If you heard a slight *crack* when reading the above description of how financial firms must look over employees' shoulders as they use Twitter, Facebook, and blogging platforms, separating the parts of each platform into "static" and "dynamic, interactive" elements, that's the sound of a huge can of worms being opened. And it gets worse.

Firms are also expected to retain records of all "business-related communications on social networks, whether those communications are official or from associated persons." As for how such record-keeping is to be implemented, "FINRA does not endorse any particular technology to keep such records, nor are we certain that adequate technology currently exists." In other words, you're own your own.

So, FINRA has asked Wall St. to monitor its employees' social media profile pages, blogs, and communications, using tools that don't yet exist and taking an "it depends on the facts and circumstances" stance in sorting out offending posts/tweets/comments from non-offending ones. Given the level of vagueness and impossibility of the new rules, you'd think that they would provoke a giant uproar and backlash from the finance industry. But you'd be wrong.

Investing blogs seem to be eyeing the rules with a wary eye, but the consensus seems to be something a long the lines of "it's impossible for them to enforce this, and they're probably not going to be too aggressive anyway." In other words, no one is running scared that FINRA, a self-regulatory organization that's overseen by the understaffed and (post-Madoff) beleaguered SEC, is going to suddenly start aggressively policing Wall Street's Facebook pages. Like so much else in finance over the past year and a half (cf. high-frequency trading), the speed of technology is far outpacing anyone's ability to regulate what's going on.

That is a remarkably vague and fine line to walk. At some point, an employee will then turn around and sue their employer for illegally monitoring and spying on their private communications. Such a dangerous path to walk for both sides.

Financial advisors already give up some privacy rights. It isn't unheard of for compliance officers to ask to see an advisors personal emails or social sights. If a personal email has ever been used to communicate with a client, that email address (and by extension, social networking site) becomes fair game for review.

Broker dealers are required to monitor and retain all broker/client communications. This is why so many of them still don't allow advisors to use internet marketing to any real degree.

FINRA's (and previously the NASD's) rules have always been loose and subject to interpretation. Just about every broker/dealer has a different interpretation of the rules.

Given how infrequently any brokers manage to beat the S&P 500 over the long term, I'm surprised anyone listens to them anymore. And anyone who gets their financial advice via Facebook or Twitter would be better served giving financial power of attorney to Homer Simpson.

About the only thing that will become of this will be that E&O insurance for investment professionals will ask if you have a blog or a Facebook page on the application. Investment professionals already know the rules for giving investment advice and claims against their E&O are taken very seriously because it directly eats into profit and reputation. Facebook is just another medium to communicate with people. It's no different or better than talking with a few people in the Starbucks line. Investment professionals know the rules.

I'm sure some will violate the rules in the same way that pump and dump stock scams are done through email spam but for the most part, this should self police itself without further involvement from FINRA or NAIC.

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